How Severance Pay Is Calculated
Severance = Weekly pay × Years of service × Weeks per year of service
| Years of service | 1 week per year | 2 weeks per year |
|---|---|---|
| 2 years at $1,250 a week | $2,500 | $5,000 |
| 5 years at $1,250 a week | $6,250 | $12,500 |
| 10 years at $1,250 a week | $12,500 | $25,000 |
| 15 years at $1,250 a week | $18,750 | $37,500 |
| 20 years at $1,250 a week | $25,000 | $50,000 |
Employers set the formula in a severance plan or an individual separation agreement. Many plans add a minimum, a cap, and the value of continued health coverage.
Is Severance Pay Required
Severance pay is not required by federal law. The Fair Labor Standards Act does not require it. Employers pay severance through a plan, a contract or a negotiated release of claims.
The federal WARN Act requires 60 days' notice, or pay in place of notice, for plant closings and mass layoffs at employers with 100 or more employees.
How Severance Is Taxed
Severance is taxed as a supplemental wage: 22% federal withholding up to $1,000,000, 37% above, plus Social Security, Medicare and state tax. The full severance counts as income in the year it is paid.
The Bonus Tax Calculator uses the same supplemental rules.
Severance Pay After Taxes
Severance after taxes is $7,035 of every $10,000 in a state with no income tax, before the tax return settles the final bill.
| Gross severance | After tax, Texas | After tax, Illinois |
|---|---|---|
| $10,000 | $7,035 | $6,540 |
| $25,000 | $17,587.50 | $16,350 |
| $50,000 | $35,175 | $32,700 |
| $100,000 | $70,350 | $65,400 |
22% federal withholding, 6.2% Social Security and 1.45% Medicare, plus the flat state rate. A large payment can push yearly wages past the Social Security wage base of $184,500, which stops that 6.2% for the rest of the year.
The 22% is withholding, not the final tax. If the year's total income sits in the 10% or 12% bracket, part of it comes back as a refund; in the 24% bracket or higher, more is owed.
Severance Pay in California
California does not require severance pay; as under federal law, it comes from a plan, a contract or a separation agreement.
- Final paycheck: a discharged employee must receive all wages earned, including unused vacation, on the last day of work.
- Cal-WARN Act: a covered establishment with 75 or more employees must give 60 days' notice of a mass layoff, relocation or closing, or pay wages and benefits for the days of notice missed.
- State tax: severance is taxable wages for California income tax, withheld like other pay.
Military Separation Pay
Full military separation pay is 10% of 12 months of basic pay times the years of active service; half separation pay is 5%.
Full separation pay = 10% × (Monthly basic pay × 12) × Years of service
A member with $4,000 of monthly basic pay and 8 years of service receives $38,400 of full separation pay, or $19,200 at the half rate.
The member generally needs at least 6 and fewer than 20 years of active service and an involuntary separation (10 U.S.C. 1174). Separation pay is taxable income, with federal income tax withheld.
Severance Pay for Federal Government Employees
A federal civilian employee's severance pay is 1 week of basic pay for each of the first 10 years of service and 2 weeks for each year after 10, plus an age adjustment.
- Age adjustment: 10% of that amount for each full year over age 40.
- Lifetime limit: 52 weeks of pay.
- Who qualifies: employees with at least 12 months of continuous service, separated involuntarily and not for cause, and not eligible for an immediate annuity.
- How it is paid: in regular installments on the normal paydays, not as one check.
Example: 15 years of service, age 45, $1,500 of weekly basic pay. The base is 10 + 5 × 2 = 20 weeks, the age adjustment adds 50% (10 weeks), and the total is $45,000.
Severance Agreements and Release of Claims
Most severance is paid in exchange for a signed release of legal claims against the employer, so the agreement terms matter as much as the amount.
- Age 40 or older: the Older Workers Benefit Protection Act gives 21 days to consider a release (45 days in a group layoff) and 7 days to revoke it after signing.
- Read for: the payment schedule, health coverage, unused PTO, bonus or commission already earned, references and noncompete terms.
- Earned pay is separate: final wages are owed whether or not the release is signed.
The PTO Calculator values unused paid time off.
Health Coverage and Unemployment After Severance
After a layoff, COBRA lets a worker keep the employer health plan for up to 18 months at employers with 20 or more employees, at a premium of up to 102% of the full cost.
Some severance agreements pay part of the COBRA premium for a set number of months. State unemployment benefits follow state rules: some states delay or reduce benefits during the weeks severance covers, others do not. Ask the state unemployment office before relying on either.
Frequently Asked Questions
How is severance pay calculated?
Severance pay is calculated by multiplying weekly pay by years of service and by the weeks paid per year. Ten years at $1,000 a week and 2 weeks per year is $20,000.
How much is severance taxed?
Severance is withheld at 22% federal plus 7.65% FICA plus state tax, about 29.65% before state tax.
Is severance pay required by law?
No. No federal law requires severance pay. A severance plan, employment contract or separation agreement sets it.
How do you determine how much severance pay to expect?
Start with the written severance plan, offer letter or employment contract, which sets the formula. Without one, the amount is whatever the separation agreement offers.
How is severance pay calculated in California?
California sets no state severance formula. The employer’s plan or agreement decides the amount; state law only sets final pay timing and Cal-WARN notice pay.
Is severance subject to Social Security and Medicare?
Yes. The Supreme Court held in United States v. Quality Stores (2014) that severance payments are wages for FICA tax.
Is a lump sum or salary continuation taxed differently?
No. Both are wages taxed at the same final rates; a lump sum is often withheld at the 22% supplemental rate, while continuation checks are withheld like regular pay.
How is military separation pay calculated?
Full separation pay is 10% × 12 months of basic pay × years of service. Eight years at $4,000 a month gives $38,400.